There are two ways we can find winning stocks. The first is to find stocks that are already recognized as quality businesses and to hold on to them for years to come. These stocks enjoy high ROE and the effect of compounding enables us to reap bumper gains.
The second method, which requires a high level of expertise, is to find stocks that are “mispriced” in relation to their intrinsic value. The mispricing could be due to a variety of reasons.
This technique requires us to be a contrarian with high levels of conviction in the stock.
Prof. Sanjay Bakshi, in his piece “7 patterns of market mispricing quality businesses”, has given seven broad “patterns of inefficiency” which leads to the mispricing of stocks. One of the patterns is the market’s inability to appreciate the probable future value of higher quality businesses with very long runways. Another is the market’s inability to spot an emerging moat that is growing slowly over time. A third is the market’s inability to forgive an entrepreneur who has committed grievous mistakes in the past. There are four other patterns given.
Unfortunately, at the end of the dissertation, the Prof does not give any examples of what he means on the ground that he does not “want to talk my book”.
However, my guess is that each of the Prof’s favourite stocks such as Ashiana Housing, Vaibhav Global, Kitex Garments etc will qualify as “mispriced” stocks because they satisfy pattern no. 1 i.e. they are “quality businesses” with “very long runways” and higher “future value”.
If you can think of any other stocks that will qualify as “mispriced” on any of the seven paramters, do share it.